Executive Summary
The green transition is a motor for economic growth. In 2023, the clean energy sector alone added USD320bn to the global economy in value added, accounting for 10% of global GDP growth. Worldwide, the momentum toward net zero has pushed up clean energy investments by over 80% in the past decade, surpassing USD2trn in 2024. China and Europe have been leading this transformation. But while China’s green investments continue to grow, reaching USD676bn in 2024 (3.7% of its GDP), Europe’s investment levels have begun to plateau at almost USD500bn, and even decreased relative to its GDP from 1.9% to 1.8% in the last two years following the onset of the global energy crisis.
In green manufacturing, China has leveraged increased investments, economies of scale and low-cost energy, capital and labor to secure a dominant position. In the photovoltaics sector alone, China accounts for approximately 80% of global production of polysilicon, solar cells and modules, as well as 97% of wafer production. The existing market dominance is reinforced by recent developments for manufacturing capacity additions. In 2023, around 70% of global clean manufacturing capacity was added in China while the EU and the US only added 13% and 8%, respectively. In 2030, China’s green manufacturing capacity is likely to be 74% higher than that of the rest of the world. With domestic demand expected to account for only one-third of this supply, it is evident that most of the expanded capacity will target global markets, further cementing China’s role as the world’s clean tech manufacturing powerhouse.
In response to China’s dominance in manufacturing and trade, the EU is increasingly adopting green protectionism. In Europe, the share of green imports from China have increased sharply from 2.3% in 2014 to 13.6% in 2023 while in the US this share remains much lower at 4.6%, the result of its protectionist stance. But Europe, too, is increasingly shifting towards protecting its (green) industries through tariffs and non-tariff measures (NTMs). New green NTMs in the EU surged from just one case in 2017 to 119 by 2023, with the bulk of new green trade restrictions (tariffs and NTM) directed at China, growing from zero in 2017 to 46 in 2023. Tariffs on Chinese EVs are just the most recent example.
At the same time, the EU is scaling up its green industrial policy to boost domestic production and safeguard strategic competitiveness. As a response to the US Inflation Reduction Act (IRA), which pledged over USD360bn in tax credits, grants and loans to enhance clean-tech manufacturing, the EU’s Green Deal Industrial Plan aims to boost the competitiveness of Europe’s net-zero industry, with REPowerEU allocating over EUR250bn for approvals, tax incentives and workforce reskilling. However, actual green subsidies are even higher than these flagship programs imply. In 2023, the US allocated USD220.5bn (0.8% of GDP) in green subsidies (88% of total subsidies). In comparison, the EU dedicates 62% of its subsidies related to industrial policies to green technologies, amounting to USD156.5bn and constituting 0.9% of total EU27 GDP.
The right mix makes the difference. Protectionist measures to safeguard local industries pose risks to the green transition and international relations. Isolationist approaches could constrain the production and export of essential goods critical for the global green transformation, leading to higher prices and potential delays in decarbonization goals. A +1% increase in tariffs reduces trade flows of green products by an average of 4.3%, with impacts varying significantly from 1.2% for batteries and up to 9.8% for electric vehicles. For solar products, raising EU tariffs on Chinese imports from 0.78% to 10% could cut trade by 12.2%, increasing costs on a EUR19.7bn market and threatening to delay critical decarbonization efforts.
In a net-zero scenario, electricity will become the cornerstone of the energy system, rising from 22.8% of the industrial energy mix in 2020 to 40.8% by 2050. This shift increases vulnerability to electricity price fluctuations, as seen during the 2022 energy crisis when European electricity prices surged, peaking at over EUR200 per MWh. Even as prices have declined, European industries still pay 39% more for electricity than the US and 73% more than China, contributing to declines in energy-intensive sectors like chemicals (-2.3% in France) and non-metallic minerals (-18.8% in Germany). The long-term risks for price stability are even greater in a fragmented climate policy scenario (2.4°C warming), where uncoordinated efforts lead to inefficiencies and heightened costs. In such a scenario, while short-term benefits may arise from localized decision-making and delayed investments in clean energy, the absence of shared commitments and collective action toward a net-zero transition would have significant long-term consequences. Avoiding fragmentation and pursuing a coordinated transition aligned with a below 2°C scenario could generate substantial energy cost savings of USD73.8bn by 2050 across the industrial, residential, commercial and transportation sectors in major European economies.
Overall economic losses in a fragmented climate transition dwarf energy costs. While short-term gains from lower electricity costs may appear advantageous for some, the long-term repercussions of a fragmented transition – stemming from unaddressed climate risks, economic inefficiencies and geopolitical tensions – paint a far more concerning picture. A fragmented transition could cost China an additional USD13.9trn (2017 prices) and the US USD6trn compared to the below 2°C scenario, representing 1.1% (0.7%) of cumulative GDP for the period 2022 – 2050, respectively. These losses are primarily driven by increased geoeconomic risks, such as disruptions in global supply chains, alongside escalating physical damages from unmitigated climate impacts. Though losses in European economies would be lower, ranging from USD0.7trn to USD1trn, no country is immune to the economic consequences of a fragmented climate transition.
To prevent a harmful cycle of fragmentation and to restore competitiveness, Europe must strengthen the transition instead of weakening it. While short-term competitiveness gains from increased protectionism are tempting, governments need to strike a balanced approach in order to avoid green fragmentation, which would delay the transition and harm Europe’s domestic industry in the long run due to higher energy costs and diminished global competitiveness. For sustainable green growth, Europe must carefully evaluate which sectors can compete globally, where protective measures are justified and where raising barriers to green trade would cause more harm than good. Wind power and hydrogen are two key sectors where Europe already holds a strong position and can capitalize on green growth opportunities, in particular if it starts thinking beyond its borders.